California state officials are responding to a growing demand by investors for disclosure on climate change risks with efforts to create uniform standards for reporting risk.
Earlier this month, the Governor’s Office of Planning and Research partnered with Stanford University’s Sustainable Finance Initiative to create an advisory group to study the challenges posed by climate change and to create disclosure standards.
“This effort will improve our understanding of climate risk from an investment perspective, ensuring California leads not only on climate policy, but on safeguarding public dollars in the face of increasing climate risk and advancing an equitable recovery,” Gov. Gavin Newsom said in a statement.
In announcing the effort, state officials pointed to the wildfires in recent years that have burned millions of acres, consumed homes and businesses and killed dozens of people. The governor also announced last week that the state has entered the second year of drought, declaring an emergency in two northern California counties.
Increased state budget risk from climate disasters and economic losses felt by local governments across the state are examples of the clear economic impacts of climate change, according to the Newsom administration.
Newsom asked the 18-member advisory group to help the state craft a climate risk disclosure standard, consistent with federal and international best practices. The advisory group was asked to focus not only on identifying best practices across national and international climate risk disclosure, but also on the unique challenges and opportunities that might arise when applying climate risk disclosure in a public-sector decision-making context.
“For every dollar we spend mitigating climate risks, we can save at least six dollars in disaster response, so understanding and adapting to these risks is not just smart policy — it’s our fiscal responsibility,” said Kate Gordon, director of the governor’s Office of Planning and Research, who co-chairs the advisory group with Alicia Seiger, managing director of the Sustainable Finance Initiative at Stanford University.
“California has already established itself as a national and global leader in fighting the climate crisis,” Gordon said, adding that “understanding climate risk disclosure will advance this effort and set an example for the rest of the United States and the world.”
A bill is also working its way through the state Assembly that would create climate change disclosure requirements for corporations, but also stipulates that the Department of Finance will work with the State Treasurer’s Office and its California Debt and Investment Advisory Commission to develop standards for state and local muni issuers that are reflective of the corporate standards by 2024. Assembly Bill 766 was introduced in February by Assembly Majority Whip Jesse Gabriel, D-Woodland Hills, and Assembly member Steve Bennett, D-Ventura.
The bill would require by Jan. 1, 2025, and annually thereafter, that corporations foreign or domestic whose executive officers are located in the state and that have annual revenues exceeding $100 million report risks related to climate change.
The state board would be required to establish climate change-related disclosure guidance specific to the industries, establish reporting standards for estimating and disclosing direct and indirect greenhouse gas emissions, include reporting standards for fossil fuel-related assets, establish a minimum social cost of carbon and require that climate scenario analyses be conducted.
Corporations involved in the development of fossil fuels would have to disclose an estimate of direct and indirect gas missions.
The Government Finance Officers Association also has an ESG (environment, governance and social) working group that is developing best practices. GFOA’s board approved guidance on best practices on the environmental piece at their March meeting, said Emily Brock, GFOA’s director.
“We realized GFOA members are probably doing things that investors would like to made aware of, they just didn’t know how to structure the information for investors and push them out in disclosures,” Brock said. “So why not give them the tools on how to push them out?”
The GFOA working group is “privileged to have a larger number of California folks, as what is being discussed in the Legislature there is so far ahead of the industry on environmental disclosures,” Brock said.
“We have tackled the environmental aspect of ESG, but I think it’s important people know that is the not the entirety of the journey,” Brock said. “The debt committee also plans to work on guidance for the social and governance pieces and more discussion is planned around voluntary disclosure.”
The debt committee is working with other national organizations that provide guidance to the muni industry on disclosure issues regarding COVID-19 and cyber security, Brock said. The organizations include the National Association of Treasurers, National Association of Bond Lawyers, Securities Industry and Financial Markets Association, National Association of Municipal Advisors and the National Federation of Municipal Analysts.
According to the findings in CDIAC study
Most issuers did not even mention climate change risk in the analysis that CDIAC did of 200 official statements of enterprise revenue bonds issued between 2016 and 2019.
The combination of the climate-related events in California and increased investor interest in climate change disclosure helped spur the study, said Robert Berry, CDIAC’s executive director.
“There has been a great deal of discussion about disclosure, so we wanted to explore what was going on in our state,” Berry said.
The 36-page study doesn’t get into disclosure best practices, but Berry said CDIAC saw the report as foundational to grappling with the scope of the issue.
The attention to the issue is already starting to have an impact, said Mrunal Shah, a partner in the public finance practice of Best Best & Krieger LLP, who has seen more issuers disclosing climate change in the months since the CDIAC study was released.
“I am starting to see an increase in disclosure from different issuers,” said Shah, who was a consultant on the study. “Though in many instances it is on projects that involve increasing energy efficiency or water conservation measures.”
Though the projects might qualify to be green bonds, often the projects are not designated as such because of the ongoing reporting requirements required for green bonds, Shah said.
Issuers that are smaller may not have the staff to do ongoing disclosure beyond the original bond statement released at the sale, Shah said.
One thing she believes will result in more disclosure in this arena from smaller issuers is more regular and specific reporting at the state and county level on climate change risks, Shah said, because the issuers could incorporate that into their own disclosure.
“It’s really an education process where issuers and professionals become aware that this is something that is material to investors that needs to be disclosed,” Shah said.
BB&K has been advising clients to disclose climate change risk, if they haven’t disclosed it, she said.
Shah referenced a recent golf course financing where the law firm discussed how drought is a major impact on revenues. The agency already had a 10-year capital plan that incorporated the risks from drought.
“We discussed what the projected climate change risks were for this particular agency,” Shah said. “We also discussed how they were mitigating those risks. That was a good specific disclosure of the impact of climate change on that security.”
The majority of reporting has been occurring in bond documents when there is a sale. Most of the ongoing disclosure apart from the initial sale has been related to natural disasters, like when a region has been impacted by a wildfire or a specific project has sustained damage from a wildfire or flooding that then gets disclosed in an event disclosure, Shah said.
It’s important that a more uniform framework is established for disclosing climate change risk, because it’s something investors are looking for and, depending on the type of security, climate change risk will likely have an impact on the security for those bonds, Shah said.
